Panicked investors continue to dump shares as the deepening crisis in Greece sends shockwaves through financial markets around world

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Stock markets around the world face another tumultuous day as the deepening crisis in Greece sends shockwaves through financial markets. 

With an hour of trading to go in London, the FTSE 100 is down another one per cent, following a two per cent drop on Monday. It is now at its lowest level since late January. 

In Europe, the stock market in Germany is down another 0.5 per cent in late afternoon trading and in France by 0.7 per cent as a debt default by Greece looks increasingly likely to end its current bailout deal tonight.  

The falls come after a dramatic day of trading yesterday, in which panicked investors dumped risky assets after a dramatic weekend in which Greek prime minister Alexis Tsipras broke off talks with his country’s creditors, closed the nation’s banks and called a snap referendum that looks set to decide Greece’s future in the eurozone.

The brutal sell off yesterday was led by the Continent’s biggest banks, that saw the Italian stock market sink 5.2 per cent while Madrid was off 4.6 per cent, Paris 3.7 per cent and Frankfurt 3.6 per cent.

Italian lenders UniCredit and Intesa Sanpaolo fell 7.1 per cent and 6.1 per cent respectively while Spain’s Santander Group was down 6.7 per cent and German giant Deutsche Bank dropped 5.8 per cent. In France, BNP Paribas and Credit Agricole were both down around 5 per cent.

The FTSE 100 index fell 2 per cent or 133.22 points to 6620.48 – its lowest level since January.

Analysts warned of ‘extreme volatility’ on global markets between now and a snap referendum in Greece on Sunday. The Greek stock market was closed yesterday – sparing Athens the carnage.

Greece owes the International Monetary Fund £1.1billion today but has said it does not have the money to make the payment.

Of even greater concern is the £2.5billion Greece owes the European Central Bank on July 20. Failure to make that payment could lead to Greek banks being cut off – plunging the economy into crisis.

Greek banks have been told to shut, and capital controls have been imposed to limit cash withdrawals to €60 (£42) a day to stop worried customers pulling out all their savings. The yield on Greek ten-year bonds soared to 15 per cent and government borrowing costs also edged higher in Europe’s indebted southern nations, including Portugal, Spain and Italy.

The pound hit a seven-and-a-half year high against the euro as worries about Greece defaulting on its debts and leaving the single currency took their toll. Sterling rose as high as €1.4298 – its strongest level since November 2007 – before easing.

Division: Demonstrators holding placards in Trafalgar Square on Monday as they protested over Greece's debt repayments

‘If Greece leaves the euro, or even just defaults, then the uncertainty around the euro increases,’ said Marshall Gittler, head of global currency strategy at IronFX Financial Services in Limassol, Cyprus.

‘A solution to Greece would be bad for the currency, default would be worse and Grexit would be terrible.’

Tsipras called a snap referendum after describing the latest offer from the IMF and Europe – which involved a five-month bailout extension in exchange for tough reforms including cuts to pensions and higher taxes – a ‘humiliation’.

Although the bailout technically expires today, the deal will be put to Greek voters on Sunday when they decide whether to accept it or not. The referendum is being seen as a vote on whether or not Greeks want to stay in the eurozone.

UK Prime Minister David Cameron said: ‘If the Greek people vote No, I find it hard to see how that is consistent with staying in the euro, because I think there would be a very significant default and a very significant problem. But it is for the Greek people to decide.’

Analysts said the referendum poses the biggest threat to the eurozone since ECB president Mario Draghi’s 2012 pledge to do ‘whatever it takes’ to save the single currency.

‘It’s hard to believe it, but the Greek referendum has called time on Mario Draghi’s “whatever it takes” promise,’ said Lena Komileva, founder and chief economist of London-based research company G+ Economics.

‘Markets need to brace themselves for the growing likelihood that the Greek stand-off will go past the wire and the euro will come out broken on the other side.’